Perspectives

RAPAPORT… As the concept of commoditization is introduced to our industry, many are fearful of what the future may hold. There is no doubt that diamonds fit the characteristics and definition of a commodity; they have simply never been traded as one. A lack of understanding as to the implications of any such scheme is evident among the varying stakeholders in our industry and must be overcome. Although traditionally resistant to change, today’s diamond market is prone to numerous outside factors directly affecting an entity’s bottom line. There is a need for our industry to pursue the commoditization of diamonds while actively seeking to counter the effects of circumstances not necessarily in our control.

While commoditization has been initiated in various markets and for various products, the diamond industry has been able to maintain a certain degree of mystique and secrecy in its dealings. Although no two diamonds are identical, the same holds true for pork bellies and a large array of alternative commodities incorporating futures markets. While the idea behind the diamond and its symbolic value must be maintained, profitability is a crucial ingredient to the sustainability of our trade. As industry debt reaches unprecedented highs of $12 billion and margins are continuously reduced, alternative business propositions must be introduced.

Many in the industry would be surprised to learn that global diamond jewelry sales currently stand at just $69 billion, with the United States representing 50 percent of demand. When considering the seasonality of the diamond business and the fact that a large portion of consumption is conducted within the time frame of four to six weeks, there is reason for concern. Like a seven at the craps table, one bad Christmas season can prove to be disastrous. One must also not ignore the rapidly decreasing dollar. It is not necessary for diamond prices to decrease for many in the trade to realize lower returns. Diamond manufacturers in India, for example, are incurring higher production costs as their revenues are earned in dollars and their fixed costs remain in the strong rupee.

While currency volatility is problematic and represents a threat to many in the supply chain, a consistent supply of product is no less a concern for many in the trade. While De Beers monopolistic role has been substantially reduced, we are all still reliant on the supply of a natural resource uncovered from the ground. As manufacturers relentlessly compete for rough diamonds to maintain their operations, limiting profits due to an unpredictable supply of a product is absurd.

Creating a free, fair, efficient and transparent environment for all industry stakeholders is what needs to be accomplished. Given the complexity of the current environment, inclusiveness and regulation can be considered of the utmost importance in any commodity scheme pursued. Enabling organizations to limit the risk involved with their ongoing business is crucial. While diamond prices have generally been increasing, downtrends may occur as well.

Although young, I am an avid history student, well aware of the extreme price volatility that occurred in the 1980s. It should be noted that a futures market was not needed for our industry to incorporate speculation and realize severe losses.

So while many are skeptical of this initiative, we at Rapaport are striving to develop a market that will attract higher liquidity and provide more transparency. The creation of truly efficient markets has its pros and cons. The value of one’s added value will come into question and will need to be adequately addressed. Those not efficiently competing in these changing times will perish, while those embracing change will be positioned to succeed. Our past norms and disappointments must not interfere with future opportunities. Our industry must evolve.